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Good morning, ladies and gentlemen. Welcome to Invesco Mortgage Capital Incorporated Investor Conference Call. All participants will be on a listen-only mode until the question-and-answer session. (Operator Instructions) As a reminder, this call is being recorded. Now, I would like to turn the call over to the speakers for today, Richard King, Chief Executive Officer; John Anzalone, Chief Investment Officer; and Don Ramon, Chief Financial Officer. Mr. King, you may now begin.

Thank you. Good morning. And welcome to the First Quarter of 2014 Invesco Mortgage Capital Earnings Call. IVR’s management team believes we can deliver optimal shareholder value over the long-term by managing risk to provide relative both value and stability and by producing a high level of current income to shareholders. Income generated through core earnings and passed along to common and preferred shareholders in the form dividends. With that in mind, we have been addressing book value stability and maintenance of strong core earnings, both through the asset and liability side of the balance sheet, as well as in the area of risk management. I’ll get back to some of things that we are doing along those lines specifically, but first, let’s briefly cover the first quarter results. As shown in the financial highlights on slide three of the presentation, in the first quarter we earned core earnings per share of $0.46, a penny lower but very consistent with the fourth quarter’s core earnings. We are focused on keeping core income high while maintaining or improving book value. In the first quarter, our book value was up $0.56 or 3% to $18.53. One way we look at value added to the quarter is adding the dividend we paid to the change per share in our book value. We paid a $0.50 per share dividend, generating economic value added of $1.06 per share in the first quarter or 5.9% roughly return on book value. That follows the book value gain of $0.33 and dividend of $0.50 or $0.83 combined per share or about 4.7% economic value added in the fourth quarter. So far in the second quarter with spreads improving further, book value is up another 2.5% to 3%, so we are on track for another strong quarter. We like…

Thanks Rich and thanks again to everyone listening in. I’ll start with slide six in portfolio update. And as Rich talked about, we continue to move the portfolio away from interest rate risk and toward a greater exposure to an improving credit environment. The graph here provides a clear picture of our progress over the past several quarters and that progress continued during Q1. During the quarter, we reduced our exposure to agency fixed rate collateral by approximately $0.5 billion mainly due not with reinvestment data. The majority of those dollars were reallocated towards hybrid ARMs where our balance increased by about $400 million. This resulted in shortening our duration profile, reduced the extension risk and made our portfolio easier to hedge. On the credit side, we are active across a number of sectors as Rich mentioned, adding exposure to our GSE credit risk transfer position, participating in another jumbo prime securitization as well as adding propositions in commercial real estate loans and CMBS. Going forward, we’ll continue to add exposure to these areas. Moving to slide seven in agencies. The bar chart on the right illustrates move away from 30 year fixed-rate collateral and toward hybrid ARMs. The current environment which has been characterized by very low prepayments speeds which you can see in the graph on the lower right, limited supply, low volatility continued said purchases has been supported to mortgage spreads. This has allowed us to reduce our exposure into strength. Over the next few quarters, we do expect the mortgage basis to struggle as the supply-demand dynamic shifts to meet the slowdown in said purchases and a seasonal demand mortgage increases off of multiyear buzz. As we said now, we’ve reduced our equity allocated to agencies by about 12.5% to 36.5%. Leverage on our agencies was…

Thank you. (Operator Instructions) Our first question today is from Trevor Cranston, JMP Securities. Your line is open.

Hi. Thanks and congratulations on a nice quarter. I guess first on the new initiatives you guys have been pretty active in the GSE credit risk sharing deals obviously. But it seems like spreads in that space have kind of continually ground tighter and tighter. Can you just comment on, kind of, where you are seeing returns there now and if your appetite for that asset class is still as high as it was during the first quarter or get worse where it’s at today?

Yeah. Hi, Trevor, this is John. Yeah, I would say on the credit risk transfer deals, I mean, obviously you are right. It did have a fair amount of tightening little bit in the last couple of quarters. We are still finding ROEs in the very low single or very low double digits there even at current spread levels. So, I mean, it still looks attractive. We still like the credit profile. I think we will see going forward, as the GSE look like they are going to have expand, the types of collateral they are going to include in this deals. So, maybe we will see a little bit more opportunity for investing in slightly flatter OEs going forward. But as of right now, I mean, we are still pretty positive right now on that asset class.

Okay. That’s helpful. And then on the commercial side you guys added a little bit of commercial loan assets and some more CMBS this quarter. Can you maybe give us an update on just the pipeline for commercial loans and also maybe talk little bit about where in the capital stake you are investing in this CMBS space right now?

Sure. So, yeah, so we close what $123 million preferred equity positions in the quarter. The pipeline, we always have a number of deals we are working on. It is a competitive space and some of them through due diligence fall out and some of them were upset on. But we are still pretty optimistic in the space that we continue to make progress. It’s lumpy, so it’s hard to say that we think we will get x amount done, but I still estimate two or three deals a quarter is what we are shooting for and the average deal is generally around $20 million. So if that gives you a good idea. And we will continue to focus dollars in this space. Right now, I think we have a term sheet towards the deals of $40 million. So with that help work out and we are working out portfolio loans. We also think there could be some opportunities in Europe. So we are optimistic going forward and we are excited about this space.

Yeah. On the CMBS side, we are still on the new origination paper, we are still taking that. On average, our single A space.

Got it. Okay. And then I guess last thing on -- obviously your credit spreads, it looks like we are the primary driver of book value in the first quarter and for everything we’ve seen it looks like spreads have continue to tighten so far in the second quarter. Can you maybe give a little of an update directionally on the impact that’s had on your book value so far in the second quarter?

Credit spreads overall -- oh, out of book value?

Yes.

I think Rich mentioned on the call, it’s -- as we get, it was up about between 2.5% and 3%.

Sorry, I missed that. Okay, great. Thank you.

Okay.

Thank you. Our next question is from Doug Harter, Credit Suisse. Your line is open.

Thanks. You guys mentioned that you’re looking to improve your funding costs and restructure some of the liabilities, give a little more detail about that?

Sure. So, I mean, we’ve got -- we’ve continued to increase counterparties. We also set up a captive insurance company and our goal is to revive capital to the U.S. residential and commercial mortgage market. Then, this is in line with the Federal Home Loan Banks mission to revive low cost financing to member institutions. And so we have our captive insurance company as a member of the Home Loan Banks, and we do think that we can finance through that captive insurance company mission-related assets and that would be banks like CMBS-based higher rated CMBS, new issue, residential loans and commercial mortgage loans.

Great. I appreciate the color there. Thanks, Rich.

Thank you. Our next question is from Nick Agarwal, Wells Fargo. Your line is open.

Hey, good morning, guys. Hey, piggyback on the HPA part, I guess you guys were talking about I think roughly low-to-mid single digits. And with tighter credit spreads, how much do you guys think that the lower HPA environments reflected in the current non-agency bond pricing?

I think it might be a little bit discipline to the subprime market, which were really not involved in. For higher quality kind of assets slow and steady increases in prices is kind of the best environment. So I think in the legacy space, generally there is just fewer and fewer bonds around, and so the technicals are quite strong, definitely more buyers than sellers. It doesn’t feel like there is much risk of a significant winding. And I think it would take house prices going down again to cause any pick up in that market.

Okay. And then next, are you going to be -- I know you don’t really own this asset class so much, but are you going to be looking at the HUD SFLS still coming up in June, that’s something of interest?

We haven’t focused on that. We may.

And then lastly, your Q2 resi securitization is broadly roughly the same size to the one you did in Q1?

Yes, it’s in the ballpark.

Okay. All right. Thanks, guys. And Don, good luck to you.

Thanks.

Thank you. Our next question is from Dan Altscher, FBR. Your line is open

Hey, thanks for taking my question, and good morning. I was wondering, as you migrate the portfolio to less credits, I mean, less rate sensitive on the agency side, clearly, the pickup in hybrid ARMs is there. But, is that pool getting harder and harder to find and why not try to go more into the 15-year side as well, as there might be some similar duration there, as maybe on some of the longer-term hybrid ARMs?

Right -- so, right, I mean, that’s exactly. We generally speaking look at 15s and hybrids. We choose between those in terms of overall value call and lately we just like hybrids a little bit better. On the supply side, I would say it’s hard to put a ton of money to work in hybrids, I mean, it is a very limited supply right now. But the good news is, we are not and we are migrating the portfolio. We’re not trying to -- we don’t need to put enormous amounts of money to work in that space. So as we’ve been not reinvesting paydowns or reinvesting paydowns out of 30-year fixed into ARM hybrids, there’s been enough supply for that. So I mean, that’s kind of where we’ve been going. So I think that kind of the answer.

We’re reducing agencies overall so the whole book is….

Right.

(Indiscernible) little bit.

Right. Okay. On the new captive insurance subsidiary, are you guys formally now a member of the FHLB or have access there. And can you also describe how that process went in terms of -- if you’re -- in process, how that process is going? How thorough is FHLB to take on exposure from mortgage re or maybe just give us a feel to how that’s going?

So just to be clear, so our insurance subsidiary is a member, the mortgage re is not. And as of right now, we have moved some of our assets down to the subsidiary and finance in the AA CMBS space. And we’ll continue to grow advances in line with the mission of the FHLBI in line with our mission.

Okay. And I assume that for the FHLB for the insurance company to exist, there has to be, I guess, insurance product that is provided. Can you just talk what that is actually?

Yeah, Dan, it’s Don. We don’t want to get into the details of that. Basically, it’s a captive insurance and organized and licensed as it should be and meet all the requirements to be a member. And we’re very excited about the opportunity.

Okay. And finally just one quick one, there’s no taxable implications like, I think, one of your peers has like they don’t have a tax issue with insurance sub?

No, there is no tax issues with an insurance subsidiary. I mean, again, its all in how you structure it. I mean, I think the way the people should be looking at this, it’s a great counterparty, it’s a great source of funding. And we think it meets the mission of the Federal Home Loan Bank but -- and they do as well. Our goal is to basically, again, continue to reduce funding cost for the company and improve our liquidity position and we think this does really help.

Thank so much.

(Operator Instructions) Our next question is from Dan Furtado, Jefferies. Your line is open.

Hi, good morning. Thank you. I apologize if you hit this already but I’m just looking for yields and/or expected IRRs on the recent jumbo securitizations have -- maybe not absolute levels if you're uncomfortable there but how they’ve changed over the past 90 days. If you’re seeing any movement on credit enhancement levels or discussions with the rating agencies as well? Thank you.

Nothings changed dramatically recently. Volumes are definitely low in the loan space as far as trading volumes. But in terms of ROEs, we’re still looking in double digit, call it 11%, 12% ROE.

Understood. Okay. Great. Thank you for the commentary.

Sure.

Thank you. And at this time, I’m showing no further questions.

Excellent. Okay. Well, thank you. Let me close by saying we’re very excited about where we are in the positive direction we’re heading. [Technical Difficulty] everybody for listening today.